#92 Ed Thorp and Claude Shannon

**David Senra** (0:00)
Much useful thought in data collection has supported the idea that neither securities markets nor betting systems prevent some venturers from gaining highly satisfactory, way above average results through unusual skill.
William Poundstone's book, Fortune's Formula, collects much of the modern evidence on this point in a highly entertaining way. Moreover, the book contains an account of the Lollapalooza investment record of Claude Shannon, pioneer scientist in information theory, that makes Shannon's methods look much like those of Charlie Munger.
Okay, so a few weeks ago when I was reading through Poor Charlie's Almanac, I came across that paragraph. Charlie Munger is one of the smartest people I've ever come across, so when he recommends reading a book, it's kind of a no-brainer to just order it immediately. So the full title of the book is Fortune's Formula, the untold story of the scientific betting system that beat the casinos and Wall Street, and it was written by William Poundstone. So for today, there's a lot of different characters in the book, and I'm going to focus on two of them, Claude Shannon and Edward Thorp. Both of them also have biographies, which will be featured in the next few weeks on Founders Podcasts. Now, a note about the format of this podcast, okay? Fortune's Formula is wildly entertaining, but it's written in a very odd and unique way. So a lot of the stuff I'm going to share with you, they're going to seem like non-sequiturs, because I wouldn't describe Fortune's Formula as a cohesive narrative. It's more like 30 or 40 individual essays that kind of tie together this theme.
It ties together this theme that there are people in the world that can actually have better-than-average performance through unusual skill. And so they're separated by chapters, but I almost consider them like essays, because some of the chapters are like a page, maybe two pages, maybe three pages. They're very short. So what I did is I just extracted my highlights and notes that I took pertaining to the overall theme of the book, and specifically the applications of that theme by Claude Shannon and Ed Thorp. And I think we're going to learn a lot today, but this story is insane and crazy, and you'll see even more when I cover... I'm going to cover Ed Thorp's autobiography next week. It's called A Man of All Markets. This guy has had an insane life, as has Claude Shannon. Okay, so let me go ahead and jump on right in. I'm going to start with Claude Shannon. I'm going to go back and forth between Claude Shannon and Ed Thorp. And we have to start with understanding why Claude Shannon is so famous. It's because he invented information theory, which is basically the foundation of our entire economy and the entire world we live in right now. And then specifically how they apply what they learned as academics to investments and making a ton of money. Okay, so it says, life is a gamble. There are few sure things. Claude Shannon was as close to a sure thing as has existed. Shannon had done what practically no one had done since the Renaissance. He had single-handedly invented an important new science. Shannon's information theory is an abstract science of communication that lies behind computers, the Internet, and all digital media. It is one of the few times in history where somebody founded the field, asked all the right questions, and answered them at once.
There were many who compared Shannon's insights to Einstein's. Others found that comparison unfair. Unfair to Shannon. Einstein's work had virtually no effect on the life of the average human being. The consequences of Shannon's work were already being felt in the 1950s. In our digital age, if people were asked to characterize Shannon's achievements, are often apt to be at a loss for words.
It's like saying how much influence the inventor of the alphabet has had on literature. Shannon's supreme opus, Information Theory, turned out to be one of those all-encompassing ideas. I do agree with Munger when he talks about why he reads so many biographies, because he says, I think when you are trying to teach the great concepts that work, it helps to tie them into the lives and personalities of the people who develop them. I've been doing that obviously on the podcast for a long time, but I want to focus a little bit about Shannon's early life and personality. He says, Shannon was born in Michigan in 1916 He grew up in a town of barely 3,000 people. There was inventing in the family blood. Thomas Edison was of distant relation. Shannon's grandfather was a farmer and inventor who designed an automatic washing machine.